New York (HedgeCo.Net) – Without admitting or denying the SEC’s allegations, Philip Falcone and his hedge fund Harbinger Capital Partners have agreed to pay $18 million and will be barred for two years from working as an investment adviser or broker.

“The SEC alleged in its lawsuit that from 2006 through early 2008, Falcone manipulated the market for high-yield, high-risk bonds issued by a company called Maax Holdings Inc. Using fund money, Falcone bought many of the bonds to shrink the supply on the market and drive up prices, the SEC asserted.” The Washington Post reported.

The SEC also said that Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, while concealing the arrangement from the fund’s directors and investors.

 “The S.E.C. also took aim at Mr. Falcone for taking a $113.2 million loan from his fund to pay his own tax bill in 2009. He borrowed the money, the S.E.C. said, at a time when the fund had blocked investor redemptions and then kept the deal secret for five months.” The NYT said.

The SEC also alleges that:

•  Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze.
•  Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.

“The charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”

The two-year ban does comes with a loophole though, the NYT reports that the ban does not apply to the nine investment advisers that Falcone runs through the hedge fund Harbinger Capital.

Alex Akesson
For HedgeCo.net
alex@hedgeco.net
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